Breaking the code

If you are employed and/or receive any form of private pension, you will have a PAYE code (or codes for multiple sources of income), calculated by HMRC and sent to your employer/pension provider. You may receive details of your PAYE code by a paper ‘PAYE coding notice’, often issued ahead of a new tax year, but if you did not, it can be checked online via your HMRC Personal Tax Account.

The PAYE system was introduced in 1944, and the PAYE code remains a cornerstone of HMRC’s effort to collect the right amount of income tax from you, particularly if you are outside the self assessment tax regime.

While the PAYE code is a single number, underneath it is a calculation which totals:

• Your tax-free allowances: This will include your personal allowance (if you are entitled to one) for each income source and any other tax-free allowances, such as tax-deductible expenses related to your work.
• Deductions for tax: This can cover taxable benefits, such as company cars, tax due on estimated untaxed interest for the current tax year and the collection of underpaid tax from previous tax years.
  
  The way in which that underpaid tax is collected often causes confusion, as it involves an HMRC estimate of your marginal rate of income tax. For example, if you are a 40% taxpayer and you owe HMRC £1,000 in tax, the deduction in your coding calculation will be £2,500 as £2,500 @ 40% = £1,000.

If you think any element that goes into your PAYE code is wrong – perhaps your new company car is electric and has a lower taxable value – contact HMRC, not your employer (or pension provider), as only HMRC can alter your code.

Tax treatment varies according to individual circumstances and is subject to change.

The Financial Conduct Authority does not regulate tax advice.